Cybersecurity Bubble Bursting for U.S. Contractors

Mar. 4, 2013 - 05:13PM
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SAN FRANCISCO — Conventional wisdom is that cybersecurity is one of the few growth opportunities for defense contractors. Nary an earnings call passes without key industry players repeatedly touting their future dominance of cyber, and the ability for the market to make up for other areas set to decline.

But quietly over the past few months, several companies have been showing some of their cybersecurity staff the door, sources said, part of a growing recognition by the industry that while cyber is growing, it will never reach the scale of aircraft or ship programs.

“It’s the myth and reality of cyber,” said Roger Cressey, senior vice president at Booz Allen Hamilton. “The myth is that it’s the fastest growing capability around, that there is tremendous pent-up demand and it is a river of milk and honey for everyone, when the reality is that it’s not that. There are pockets of need, but there’s also a requirement for specialized skills and capabilities.”

In January, General Dynamics announced a goodwill impairment that affected the company’s balance sheet to the tune of $2 billion. That drop was largely attributed to revised market expectations at the company’s division that handles its cyber business.

At the RSA Conference here last week, the largest annual gathering of cybersecurity professionals in the U.S., all signs pointed to a cybersecurity industry that is doing quite well. The conference was well- attended, with hallways packed outside of the main exposition hall prior to its opening and security guards turning away participants at open sessions because of overcrowding. Conference officials said the wait list for exhibitors wanting floor space at future shows was growing.

The conference is mostly focused on the commercial market, and though many companies at the show do some federal work, the emphasis remained on enticing corporate clients to invest in cybersecurity.

Quantifying the size of the cybersecurity market for the federal government is difficult, if not impossible, as even defining cyber can be an exercise in futility. Industry group TechAmerica attempted to generate a dollar figure as part of its overall market projections in 2011, but declined to repeat the effort in 2012 due to the difficulty of defining the space.

What is clear is that senior administration officials are attempting to shelter cyber from budget cuts, and even boost investment in the area. Seeing a market area with growth potential, defense contractors have been quick to bolster their capabilities and market their successes.

But building up capabilities doesn’t guarantee long-term success.

“I think we can liken it almost to the dot-com bubble,” said Harry Raduege, former commander of the Defense Information Systems Agency and chairman of The Deloitte Center for Cyber Innovation. “Remember when we had all the dot commers coming in? There were a number of them that collapsed on themselves or failed. But there were others that became market leaders and grew. Cyber has certainly been the major emphasis point, and everybody has wanted to get their oar in the water. Some ideas survive and flourish, others fall by the wayside. I think it’s a natural process of elimination.”

That elimination process is being driven by a government customer that is buying smarter, said Cressey, who held a variety of senior positions in the Clinton and George W. Bush administrations culminating in appointment as the director for transnational transitional threats on the National Security Council staff in 1999.

“There is differentiation going on,” he said. “While you have to be cost-competitive, you also have to be capable at the same time. There are a lot of folks out there who are cost- effective, but simply can’t deliver. They can’t deliver the resources, the product, and implementation is the holy grail here.”

Part of the cost equation that has been shifting quickly is the limited supply of true cyber experts, and the corresponding rise of salaries with increased demand.

A report released Feb. 25 by Clearancejobs.com said that while overall jobs for those with security clearances saw a 3 percent decline in salaries in 2012, cyber experts are doing quite well: 82 percent of cybersecurity professionals polled said their compensation was either static or had gone up in the past year.

The competition in industry is showing in salary figures. While those working for government made $99,309 in 2012, those in industry made $107,260.

“There’s a big discrepancy, and there usually is, but it’s bigger here than it is with a lot of other skill sets,” said Evan Lesser, managing director at Clearancejobs.com.

Unsurprisingly, given the fierce competition for talent in a marketplace with few qualified experts, 64 percent of cybersecurity professionals said they were interested in testing the job market, with 36 percent of respondents saying they were likely to switch jobs in the next year.

With experts ping-ponging between companies because of large salary offers, the cost of operating a cyber unit has climbed. With the market likely growing in the magnitude of millions, not billions, companies are still figuring out what cyber will be.

“I think the market space is still immature,” Cressey said. “I don’t think it’s a function of competition, I think the market space is still evolving.”